Opinion: Technology is changing the nature of money. This is how it will affect our lives


Prashad: The convenience of digital payments for consumers and businesses makes it highly unlikely that cash will survive much longer.

In China, there are two private payment providers, Alipay and WeChat Pay, which have covered the entire Chinese economy with ultra-low-cost digital payments. You can use them for something as simple as buying, for example, a piece of fruit or some dumplings from a street vendor. In advanced economies like Sweden, the private sector is also doing a good job of providing digital payments at very low cost.

IMF: Is it likely that cryptocurrencies like Bitcoin will be used to buy a cup of coffee or pay the rent?

Prashad: Bitcoin hasn’t done very well as a medium of exchange that can be used for day-to-day transactions. One of the main reasons is that Bitcoin has a very unstable value. It’s like taking a bitcoin with you to a coffee shop, and one day you can buy a full meal with it and another day just have a small cup of coffee. Also, Bitcoin is a bit slow and cumbersome to use.

IMF: Some countries are considering adopting a so-called central bank digital currency (CBDC). What is the rationale?

Prashad: For some developing countries, the goal is to expand financial inclusion. Many people in these countries do not have access to digital payments. They do not have access to basic banking products and services. In countries like Sweden, where most people have access to bank accounts, the imperative is a little different. Sweden’s central bank, the Riksbank, envisions the e-krona, or digital krona, as essentially a backstop for private payment infrastructure.

IMF: And China?

Prashad: The Chinese government is very concerned about two payment providers dominating the payment system and effectively blocking the entry of new competitors who could bring innovations. The Chinese central bank sees the digital yuan as essentially a complement to existing payment systems, but which could in principle increase competition.

IMF: How does a digital currency affect a central bank’s ability to control inflation and ensure full employment?

Prashad: Let’s say that all US citizens did, indeed, have an account with the Federal Reserve, then it would be much easier for the Fed to undertake certain operations such as stimulus payments.

When the pandemic hit, the original coronavirus stimulus bill involved transferring a large amount of money to American households. Many households that had direct deposit information on file with the Internal Revenue Service were able to obtain direct deposits to their bank accounts, but households that did not have this information on file with the IRS ended up getting debit cards or prepaid checks, many of which were lost in the mail and some of which were misappropriated or mutilated.

IMF: Could central bank digital currencies be used to fight tax evasion and other crimes?

Prashad: If you can’t use cash to pay your gardener or babysitter, it’s much more likely that those payments will be reported to the government. And especially for high-value transactions, it will certainly make a difference in terms of tax revenue. Having digital money also reduces the use of cash for illicit transactions, for example for drug trafficking or money laundering.

IMF: Are there any risks for private sector banks and payment providers?

Prashad: If the government is indeed providing a digital payment system at very low cost, it could make it very difficult for private payment providers to continue their services because after all, what private company can compete with the deep pockets of government?

Another risk is that commercial banks, which are very important in modern economies in terms of providing credit that fuels economic activity, could find that their deposits are washed away in central bank accounts. In times of turmoil, depositors might feel that ultimately their deposits will be safer with the central bank or other government institution than with a commercial bank, even if the commercial bank’s deposits are insured.

IMF: Is there a solution to this problem?

Prashad: Experiments with CBDCs that are underway in China and Sweden suggest that what might work more effectively is a two-tier system of CBDCs. The central bank would provide the underlying payment infrastructure and provide the CBDC essentially in the form of digital tokens, but the actual digital wallets in which these CBDCs are held would be held by commercial banks.

China's Digital Yuan Shows Why We Still Need Cryptocurrencies Like Bitcoin

IMF: Do you see a digital yuan threatening the dollar’s dominant position as a global currency due to China’s status as a rapidly growing global economy?

Prashad: It is not only the economic size or the size of the financial markets of a country issuing a particular currency, but also the institutional framework of that country that maintains the confidence of foreign investors. And those elements of trust include the rule of law, an independent central bank, and an institutionalized system of checks and balances. In all of these dimensions, I think the United States still retains dominance over much of the rest of the world.

IMF: The US Federal Reserve has a cautious attitude towards CBDCs. Why?

Prashad: You have to think about what the use case for CBDC really is in each country, and in the US we certainly have some issues with our payment systems. Many payments are intermediated through credit cards, which are actually quite expensive for merchants to use due to very high interchange fees. And many of these costs are passed on to consumers.

About 5% of households in the United States are still unbanked or underbanked. So you and I can use Apple Pay, but to use Apple Pay we need to have it linked to a bank account or credit card, and many households simply don’t have access to it.

Thus, a CBDC could at the margin increase financial inclusion, but the Fed already has a major project underway called “FedNow” to increase the efficiency of retail payments as well as wholesale payments; that is, payments between businesses and financial institutions.

IMF: Do official digital currencies pose wider dangers to society?

Prashad: You might see an authoritarian government using a digital version of its central bank currency essentially to monitor its population. And even a benevolent government might decide that it wants to make sure that the money its central bank issues not only isn’t used for illicit purposes, but also isn’t used for purposes it might consider as not necessarily socially beneficial.

You may well begin to see money used as an instrument not just of economic policy, but potentially even of social policy. This would be dangerous for the credibility of central bank money and for the central banks themselves.


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